Cross-Margin

To fully understand cross-margin, it is essential to contrast it with its alternative: isolated margin. This is a critical risk management distinction.

• Definition: In isolated margin, collateral is allocated and ring-fenced for a single position or a defined set of positions.
• Key Difference: Losses are contained to the specific allocated margin. The liquidation of one position does not affect collateral in other, separate positions.
• Use Case: Preferred for speculative, high-risk trades where the trader wants to define and limit maximum loss upfront.
• Trade-off: Provides less capital efficiency than cross-margin, as collateral cannot be reused across the portfolio.

The primary advantage of cross-margin is the optimal use of capital. Collateral is not siloed per position, allowing unused margin from one position to support others. This means a trader can open larger positions or more positions with the same amount of capital compared to an isolated margin model. For example, if a position is profitable and has excess margin, that excess is automatically available for new trades.

By pooling collateral, cross-margin provides a stronger, unified buffer against price volatility. A loss on one position can be offset by the profit or unused margin from another, making the overall account less susceptible to liquidation from a single adverse price move. This creates a more resilient portfolio, though it's crucial to understand that all pooled collateral is at risk if the net account value falls below the maintenance margin requirement.

Cross-margin automates margin allocation, removing the need for manual transfers between positions. Traders manage one consolidated account balance and margin level instead of monitoring individual margins for each trade. This reduces operational overhead and complexity, especially for strategies involving multiple correlated assets or hedging positions.

This model is well-suited for advanced strategies like delta-neutral portfolios, basis trading, or multi-leg options strategies. It allows profits from one leg of a trade to immediately secure another leg without manual intervention. It's the standard model for professional trading desks and perpetual swaps markets where rapid repositioning is critical.

Understanding the advantage requires contrast with isolated margin, where margin is assigned per position.

• Risk Containment (Isolated): Losses are capped to the margin allocated to a single trade.
• Capital Efficiency (Cross): Maximum capital utility but with shared risk across all positions. The choice depends on the trader's risk tolerance and strategy; cross-margin favors efficiency, while isolated favors defined, compartmentalized risk.

The efficiency of cross-margin comes with the responsibility of active portfolio risk management.

• Monitor Net Liquidation Value: The entire portfolio's health is key, not individual trades.
• Use Stop-Loss Orders: Essential for defining maximum acceptable loss on any single idea.
• Understand Correlation Risk: Highly correlated positions increase the risk of simultaneous drawdowns, rapidly depleting the shared collateral pool. It is a powerful tool that requires disciplined oversight.

In a cross-margin system, a sharp price drop in one asset can trigger the liquidation of a large, shared collateral pool. This can force the simultaneous unwinding of all associated positions, not just the losing one. The resulting sell pressure can create a feedback loop, exacerbating market volatility and potentially causing cascading liquidations across the protocol and connected markets.

The efficiency of cross-margin is predicated on uncorrelated or diversified assets. If multiple positions are exposed to the same underlying market factor (e.g., a broad crypto market downturn), their losses become additive. This high correlation rapidly depletes the shared collateral, increasing the probability of a total account liquidation even if individual positions seemed safe in isolation.

Cross-margin logic is implemented in smart contracts, concentrating risk in a single codebase. A bug, exploit, or governance attack on the margin engine can result in the loss of the entire collateral pool. Users are also exposed to protocol parameter risk, where changes to liquidation thresholds, fees, or oracle mechanisms can adversely affect all positions at once.

In decentralized protocols, the 'counterparty' is the protocol's liquidity pool and insurance fund. If a major, cross-margin account is liquidated at a significant loss, it can drain the protocol's reserves. This creates insolvency risk for the protocol itself, potentially leaving other users' collateral under-secured or resulting in socialized losses where remaining users bear the deficit.

Managing a cross-margin account requires vigilant, real-time monitoring of the aggregate health ratio across all positions. Key tasks include:

• Tracking the weighted average risk of the entire portfolio.
• Understanding complex interactions between position P&L and collateral.
• Reacting swiftly to margin calls that threaten the entire account, not just one trade. Automation failure or user error in this complex environment can lead to rapid, total liquidation.

Cross-Margin: Collateral is a shared pool. High capital efficiency but higher systemic risk; one failing position can doom all others.

Isolated Margin: Collateral is ring-fenced per position. Lower capital efficiency but contained risk; a liquidation only loses the allocated collateral for that specific trade.

The choice is a direct trade-off between leverage efficiency and risk isolation. Sophisticated traders often use a mix, isolating high-risk positions while cross-margining correlated, lower-risk ones.

A risk management method where collateral is allocated to a single position. This creates a strict separation of risk, as the loss of one position cannot affect others. It is the direct counterpart to cross-margin.

• Key Feature: Position-specific liquidation.
• Use Case: Preferred for high-volatility or experimental assets where containing loss is paramount.

A notification or automated process triggered when a trader's account equity falls below the maintenance margin requirement. In a cross-margin system, a margin call applies to the entire portfolio's health, not a single position.

• Mechanism: Requires depositing more collateral or closing positions.
• Cross-Margin Impact: A losing position can drain shared collateral, putting all other positions at risk of a portfolio-wide margin call.

The forced closure of a trader's positions by the protocol when their collateral value can no longer cover potential losses. This occurs after a margin call is not remedied.

• Cross-Margin Liquidation: The entire portfolio may be liquidated if the shared collateral pool is insufficient, even if some individual positions are profitable.
• Liquidation Engine: The smart contract logic that executes this process, often involving keepers or liquidator bots.

A discount applied to collateral value for risk calculation purposes. It is a buffer against market volatility and liquidation slippage.

• Purpose: Protects the protocol from under-collateralization.
• Example: A $100 asset with a 10% haircut is valued at $90 for margin calculations.
• Cross-Margin Context: Haircuts are applied to the entire collateral pool, affecting the available margin for all positions.

A sophisticated margin system that calculates requirements based on the net risk of the entire portfolio, considering correlations between assets. It is an advanced form of cross-margin.

• Key Difference: Uses risk models (e.g., SPAN) to offset correlated positions, potentially lowering total margin required.
• Benefit: More capital efficiency for diversified, hedged portfolios compared to simple cross-margin.

The minimum amount of equity, as a percentage, that must be maintained in a margin account. Falling below this level triggers a margin call.

• Function: The safety threshold before liquidation.
• Cross-Margin Application: The maintenance margin ratio is checked against the total value of the shared collateral pool relative to the total risk of all open positions.